CREDIT SUISSE: Britain's housebuilders are set for a comeback

Wikimedia Commons In the aftermath of the UK's vote to leave the European Union, one of the sectors of the economy that is widely being slated to take a big hit is the world of property. Predictions and warnings have been stark and widespread.

Still, this panic has not stopped equity analysts at Credit Suisse from arguing that the UK's homebuilding sector is ripe for big gains, and therefore changing their recommendation on the shares of companies in the space to "benchmark," an upgrade from its previous "underweight" rating

CS is making what seems like a counterintuitive bet on a sector that most people seem to be discounting in the post-Brexit investment landscape, arguing that housebuilders like Barratt and Persimmon — which have lost more than 20% of their market capitalisation since the referendum — are set to perform better than most would expect in the aftermath of Brexit.

Credit Suisse research analyst Andrew Garthwaite and his team give five reasons for their upgrade on the UK's housebuilders. Here are the four most crucial:

The way housebuilders are valued— CS notes that the price to book value — a measure of how a company's share price is compared to its book value — of shares in companies like Persimmon is pretty much neutral. Their post-Brexit fall has essentially just taken builders back to where they should have been. As Garthwaite and his team note: "The yield relative of the sector has also picked up sharply back to historic average levels. Looking at the long-run relative performance of the sector, around half of its outperformance since 2012 has now been given up."

The market is overestimating how much house prices will fall— "We don't think house prices will fall by as much as they normally do. Historically, to get a major correction in housing you have needed overvaluation, rising rates and a decline in employment. Currently, overvaluation is apparent only in London and the South East (as we discuss below), and the cost of servicing a mortgage continues only to decline. That said, employment does seem likely to fall," Credit Suisse notes.

"In the long run, this is an undisrupted sector"— Basically, CS argues, there will always be a need for housing, and it has now been more than 41 years since there has been more housing supply than there has demand. "Not only are there few alternatives to housing (although homes have been made in China with 3D printers) but UK housing demand is almost permanently above supply. The UK needs around 220K homes a year yet this year only around 155K homes will be built."

Outside London, the government is probably going to try and support the housing market— "The Help to Buy scheme for new build (which has accounted for c40% of new builds) has already been extended to 2021 and we think it is quite possible that the funding for lending scheme could be expanded. We suspect that the Help to Buy Scheme for existing homes will be extended."

Garthwaite and his team also note that the housebuilding sector is currently around one standard deviation oversold, meaning that shares are going for less than their true value.

While the Credit Suisse team are broadly positive on the housebuilding sector, they do have three key concerns about potential issues. First, "when housing rolls over, it corrects by more." Second, they realise that London is a real problem, with the house price to earnings ratio incredibly high. Third, they note fears about escalating building costs.